How an Indiana pharmacist is teaming up with employers to fight the hidden hospital prices that drive up health care costs
Gloria Sachdev landed at the helm of the Employers’ Forum of Indiana in 2015, feeling like the proverbial woman from outer space. A pharmacist for most of her career, she knew relatively little about the world of employer-sponsored health insurance—the medical coverage companies provide through their employee benefit programs. But she knew for sure that the topic was the driving force behind the EFI, a coalition of Indiana-based employers who had banded together to try to solve the problem of their fast-rising health care spending.
When she asked EFI members about their challenges, they bemoaned the soaring costs. A few companies with national footprints—engine-maker Cummins and auto giant Chrysler, for example—wondered why hospital care in Indiana seemed to cost them more than elsewhere in the country.
Sachdev has the training of a scientist, and she wanted data to form her own evidence-based conclusions. The problem was she had no data. Like employers across the country, her members didn’t have any idea what they paid for procedures, and what they paid where. That meant that she, and they, had virtually no clue how to begin lowering costs, for themselves or their employees.
That absurd situation, where companies collectively spend hundreds of billions of dollars annually without understanding where the money is going, is a direct result of the way America’s employer-sponsored health care market is structured. And the absurdity cascades down in ways that saddle those companies’ employees with higher costs and leave some unable even to afford coverage.
As with most large employers, EFI’s members have self-funded health plans, meaning the companies themselves—rather than an insurer— bear the financial risk and directly pay their employees’ medical claims. But these large companies typically outsource the management of their health plan to a third-party administrator, or TPA, that performs many of the functions an insurance company would, setting up provider networks, negotiating rates on the employers’ behalf, and processing claims. As it happens, the nation’s largest health insurers are also in the business of administering self-funded health plans as TPAs—and it’s with them, where the data gets trapped.
In most cases, Sachdev learned as she dug deeper, companies’ TPAs insert gag clauses into contracts, forbidding the disclosure to the companies of the rates they’d negotiated with hospitals. Instead, plan administrators usually sell their services to employers by quoting the percent discount they’ve negotiated off hospital charges.
Sachdev, the self-described data-loving “science geek,” was floored that large, financially savvy companies went along with these industry customs. “When I first started, I’d be meeting people and I’d say ‘Why did you pick Anthem? Why did you pick United Healthcare?” recalls Sachdev, a lively speaker who recounts stories as if she’s a traveler returning from a very strange land. “And all the employers would say ‘You can’t beat those discounts.’ And I’m like, ‘Discounts off what?’”
“It’s like going into the Zales Diamond Store—everything is 50% off, but you need to know what the starting price is or what the final price is.” Even so, “that’s what everyone was doing. Nobody knew,” she told me in an interview last year.
Sachdev found the situation patently absurd, and just plain wrong. As health plan sponsors, employers have a fiduciary responsibility to spend their plan’s dollars in the best interest of employees. “How can they do that when they don’t know what the prices of things are?” she says.
That started Sachdev on a revolutionary, if slightly geeky effort that is still gathering momentum today: the Employer Hospital Transparency Project (EHTP), which has been partnering with the RAND Corporation on a groundbreaking, long-running price transparency study. The fourth, most comprehensive iteration of that study is due to be published later this month: It will report out pricing information on 4,000 hospitals in 49 states and the District of Columbia. And it’s likely to provide the clearest picture yet of the employer-sponsored marketplace, a major step toward making quality health care more affordable and accessible for more Americans who get insurance at work.
$1 trillion in spending, cloaked in secrecy
Even in the dysfunctional markets of American health care, it’s hard to convey just how big, and completely bonkers, the system that dictates $1 trillion-plus in employer-sponsored health insurance spending really is. Roughly 155 million Americans, more than half the U.S. population, were insured through an employer in 2021.
Historically a huge perk for working Americans and a reasonable talent-attracting expense for employers, the cost of health coverage is fast becoming prohibitively high for all involved, rising far faster than wages and inflation over the past several years. In 2021, the average annual premium for commercial insurance was $7,739 for individual coverage, and $22,221 for family coverage—22% more than five years ago and 47% more than 10 years ago, according to the Kaiser Family Foundation. Employees, on average, contribute roughly $1300 to that individual premium (17%), and $6000 (28%) to a family’s. It’s a lot to pay for health care that falls short by many measures: Studies have shown that many countries that spend far less per person on health care deliver far better quality of care than the U.S. does.
What these figures boil down to is a growing number of Americans who are “underinsured”— they have insurance, but struggle to pay medical bills, incur health care-related debt, or simply skip care because they can’t afford it. Growth in the hospital and insurance industries over the past decade, meanwhile, has been robust: Annual hospital spending increased 57% over that span, according to government statistics. The nation’s four largest publicly traded insurers (which own the three largest pharmacy benefits managers, or PBMs) pulled in more than $835 billion in revenue from those businesses in 2021, up 158% from $323 billion they booked in 2011.
The situation is consequential for American companies, too: The more than $1 trillion that employers pump into health care every year is money they don’t spend on wages or other investment. That dismal status quo is what inspired the 2018 launch of Haven, a buzzy effort , that set out to tackle the problem, backed by three of the world’s most powerful companies—Amazon, Berkshire Hathaway, and JP Morgan—and helmed by journalist and health policy thought leader, Atul Gawande. That dream team gave up after just three years, though JPMorgan, through its new health arm, Morgan Health, is trying again on its own.
While Haven’s every twitch seemed to make big, market-moving news, a relatively scrappy group of employer-led health coalitions like EFI have been working for years to call attention to the issue. A key component to that strategy is creating greater transparency of costs and quality in America’s $4.1 trillion health care market. Among those efforts are a set of federal price transparency rules issued by the Trump administration (and backed by Biden’s) that require hospitals, and soon insurers and employers, to publish plan-specific prices, among other things.
Advocates argue that transparency is a necessary tool to reverse runaway spending—both to empower consumers and employers in get better value in health care, and to keep the prices set by insurers and health systems in check. The hospital and insurance industries, meanwhile, have fought mightily (and litigiously) against the movement, arguing that transparency is only helpful when it comes to consumer prices; publishing what insurers and health plans are billed will confuse the issue, they say. Plus, they argue, the government’s reporting requirements are impractical and onerous, and transparency may actually drive prices higher.
So far, the effect of such rules has been underwhelming. A study earlier this year by the PatientRightsAdvocate.org, a non-profit pushing for price transparency, found that only 14.3% of the nation’s hospitals have so far complied with federal rules, implemented in January 2021, that require them to post prices, including the rates they’ve negotiated with individual health plans. A Wall Street Journal investigation last year, meanwhile, revealed that hundreds of hospitals used special search-blocking code to hide their published price information from internet search engines.
Many advocates hoped the publication of hospital prices would give rise to consumer-friendly price comparison tools, but so far the combination of the industry’s skullduggery and inaction has largely prevented that. “We’re in this quagmire where there’s all this out there and nobody’s complying,” says Chris Skisak, the Executive Director of the Houston Business Coalition on Health (HBCH), a peer organization to EFI with members like Shell and Chevron. “Nobody’s enforcing requirements. They’re just kind of there.”
Though the Biden administration raised the fines that can be levelled against non-complying hospitals—from $300 a day to a maximum of roughly $2 million per year for those with 30 or more beds— enforcement has so far been lax. “I don’t think [most] hospitals take it very seriously. They’re happy to pay those fines in most cases,” says Dan Burke, director of corporate benefits for Turner Industries, a Louisiana-based construction company with more than 18,000 employees across the country. Burke says he has found the government’s hospital transparency initiative, so far, not useful.
But for employers, the stakes are high nonetheless. A second phase of the federal transparency rules, which is set to go into effect on July 1, will require both insurers and health plan sponsors—that is, employers like Turner—to step up too, and publish physician and hospital price information. These are the same closely guarded negotiated rates that Sachdev found her employee members couldn’t get; and getting them is now a major focus for Burke, who is also working with consultants and carriers to ensure compliance with yet another federal transparency initiative. As outlined in the 2021 Consolidated Appropriations Act (CAA), employers will be required to work to eliminate gag clauses from their contracts, to collect certain financial disclosures from brokers and consultants, and to provide annual reporting on information on prescription drug spending.
That looming deadline has some companies sweating. Shawn Gremminger, who until recently served as the director of policy for the Purchaser Business Group on Health, an influential coalition of some of the nation’s largest corporations, describes the requirements as a tough ask for employers. “Even though we [employers] are the ones who are responsible for collecting the information and posting it, this is all information that is very hard to get from our health plans and PBMs in particular”; in other words, employers have to “beg,” he explained. “Things will get serious this summer,” he says, adding that if employers aren’t successful, “I expect a tense situation with lots of finger pointing.”
Everyone was like, ‘WHAT?’ Five times as much as Medicare for the exact same service? This is insanity.Gloria Sachdev, CEO, Employers’ Forum of Indiana
Michael Thompson, the president and CEO of the National Alliance of Healthcare Purchaser Coalitions, a non-profit that coordinates activity among regional employer coalitions like EFI and HBCH, says it’s hard to overstate the significance of the CAA’s implications for America’s companies. “For major employers, this is probably even more important than the Affordable Care Act,” he says. “It really raises the bar on disclosure and transparency.”
Thompson says awareness of the new law is extremely low among employers, but he expects that in time, the required reporting will unleash a new era of accountability in the health care market, akin to changes that swept the retirement-savings industry when disclosures became required around consulting fees and relationships. “When you open up the curtain, you’re going to find that things are happening that you didn’t know were happening. And if you find those things, and they don’t look kosher, I think you’ve got to take action.”
Big companies could wield big leverage
Industry may be resisting the federal government’s efforts to lift that curtain, but Sachdev’s work at EFI suggests that employers, acting collectively, can be a force in their own right.
In the first iteration of the Hospital Price Transparency, in 2017, EFI partnered with the research firm the RAND Corporation to crunch its members’ claims data and compare the commercial rates they paid against Medicare prices at 120 Indiana hospitals. (After some negotiation, plan administrators agreed to share data with RAND for the purpose of the study.) RAND’s analysis found employers were paying, on average, 272% of Medicare rates, and in some cases as much as 500%. “Everyone was like, ‘WHAT?” says Sachdev. “Five times as much as Medicare for the exact same service and level of complex patient? This is insanity.”
Crazier still, was the variability of the data: “Physician groups are getting paid hugely different amounts [for the same procedures], even within the same health system within the same state by the same insurance company…We’re like, “Why? What’s going on? And why is it so complex?”
The results were just as surprising to insurers and hospitals, Sachdev adds. “They didn’t know how they compared to their peers, because all those contracts were hidden. Nobody ever knew what the negotiated prices were.” When Sachdev took the data to local hospital CEOs, they blamed their mix of patients; because of the number Medicare and Medicaid patients they treated, they told her, they had to charge more to patients with private insurance.
Verifying those claims led Sachdev and RAND to the 2.0 version of their study—expanding the effort to include employers and their claims from 25 states. She wanted to see how Indiana compared, and once again, the results stunned her: Her state topped the list for the highest mark-ups on hospital charges. But RAND 3.0, published in 2020, included even more hospitals, in 49 states—with claims totaling $33.8 billion—and it showed that the problem wasn’t confined to the Hoosier state. It found that nationwide, hospitals charged commercial insurers, on average 247%, more than they do Medicare; in some cases, they are charging more than 7 times Medicare rates.
RAND’s findings have gob-smacked and educated self-insured employers nationwide—some of whom have begun to overhaul the way they purchase health care, turning to direct contracting (cutting out the plan administrator’s role in negotiations with providers) and reference-based pricing (paying a flat percentage of Medicare charges) to lower costs. When RAND 4.0 comes out this month, it will be launched in tandem with a free web-based tool that displays the findings alongside other hospital and quality data, with the aim to better inform employers and consumers in their health care choices.
“Transparency, in and of itself does not create lower healthcare costs,” notes Sachdev. “Unless someone does something with that information it’s just data reports.” In Indiana, she’s begun to see signs of that, with employers applying pressure to insurance companies and hospitals—including the most expensive system in the state—to lower prices. The efforts have also raised awareness in the state and paved the way for legislation—banning gag clauses, for example—that became a blueprint for federal transparency efforts.
People who work in the space hope the combined effect of the federal rules and grassroots transparency movement will continue to translate into meaningful action. With the increasing regulatory scrutiny of employers and their fiduciary responsibility in managing health plans, they may not have much of a choice. Burke, of Turner Industries, the construction firm, is closely watching the space for legal suits filed against self-insured employers for purchasing high-cost health care.
The tight labor market, inflation, and the pandemic environment make it a tough moment to press hospitals and insurers on cost. But for many, like Burke, the hope is data will make their case stronger—in part to those in the employer community that remain complacent on the issue. “Individual companies have been loath to [demand change] for a long time,” says Burke. “Employers—we need to be more engaged as a group and get collective influence together to be able to demand some change in the healthcare system.”
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.